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The SEBI And IBC RIFT: Do The Laws Need Reforms?

This article aims to look deep into the arena of the jurisdiction of both the legislations i.e Security and Exchange board of India Act, 1992 and Insolvency and Bankruptcy code, 2016 which are always in a constant tussle with each other over a period of time. Main question regarding the rift is the arena of section 238 of IBC which generally overrides the provisions of the other actors. This article tries to analyze the claims of both the acts in a recent dispute that has yet to be decided by the apex court and highlights the important aspects of the rift that has occurred once again between both the legislations.

The insolvency and bankruptcy code was enacted in 2016. It was a consolidating act which aims to prevent delays. In the absence of one concrete law over the matter, the case took many years to complete due to the presence of multitudes of legislation. Therefore, IBC was enacted by the parliament for the reorganization and insolvency resolution of corporate firms. But recently insolvency and bankruptcy code came in a rift with SEBI a regulatory authority which was established by the SEBI act 1992 to protect the interest of investors and it has the power to encompass the stock exchange regulations.

IBC V/S SEBI: Issue Of Dominance
The major rift between IBC and SEBI over the issue of jurisdiction has bought a paradigm shift in corporate law. Various questions became a matter of concern which has to be decided by the apex court. The matter was previously pending with NCLT which ordered SEBI to de-attach the property belonging to the corporate firm which was admitted in the corporate insolvency resolution process under IBC. In BHANU RAM V.S HBN DIARIES AND ALLIED LIMITED, HBN DIARIES opted for a collective investment scheme without obtaining registration from SEBI.

When SEBI came to know about this, they attached the assets of the corporate firm to compensate the investors under sections 11 and 11B of the act[1]. However, in the time being, investors filled for the CIRP in NCLT against the company. In layman's terms, the corporate insolvency resolution process (CIRP) is a recovery mechanism given under the IBC to the creditors when the firm becomes insolvent[2]. Section 32A[3] provides concession to the firm or debtor from the prosecution of offenses done before the beginning of the process of CIRP under IBC.

Therefore, NCLT held that property attached by SEBI should be de-attached as investors have already been applied for the process of CIRP to declare the firm insolvent. NCLT also placed stress on section 238 of the insolvency and bankruptcy code which states that if any law became inconsistent with the IBC then the provisions of this code will override other laws. Going by Section 238 of IBC, NCLT held that the moratorium provisions contained in section 14 of IBC will override section 28A of SEBI act which confers SEBI with the status of recovery officer empowered the regulatory body to sell the movable and immovable property of a corporate debtor for the recovery process. Using their discretion, SEBI appealed in NCLAT (National Company Law Appellate Tribunal) which held the same view. Aggrieved by this, the matter has been taken to the Supreme Court by SEBI in the case of SEBI V/s ROHIT SEHGAL.

Analysis Of The Case
Over the question of the arena of section 238 of IBC, NCLAT observed in case Shobha Limited v/s Pan Card Clubs Limited that section 238 would not override the provisions of other activities. The view will be taken according to the facts, circumstances, and will be based on the distinction. Hence, it should be realized that section 238 of IBC is not absolute.

However, NCLAT in Bhanu Ram v/s HBN Diaries And Allied Limited, HBN Diaries took an opposite approach in the context of section 238. It should be realized by NCLAT that these two legislations are not inconsistent with each other as IBC concerned with the relationship between debtor and creditors while SEBI deals with the interest of investors in the market.

Hence section 238 should not be applied as it can only override in the case of inconsistency. Plus it should be highlighted that those who invested in a corporate firm were investors, not lenders but holders of units, and hence, applications should not be filled under IBC.

There is no doubt that an accommodating relationship should be there between both the legislation i.e. IBC and SEBI act. There is a need to protect the interest of all the parties which includes investors, lenders, and corporate firms. SEBI is a regulatory body, therefore, it is somewhat obvious that they will be a bit hard on corporate firms whereas, the insolvency and bankruptcy code is a bit lenient on firms as the legislation itself were made to assist those firms which are on the verge of bankruptcy or were already bankrupt.

Due to this diverging field of interest, it is pretty obvious that there will be a rift but still, the harmonious relationship should be there so that all parties can be assisted. In March 2019, an MOU was signed between SEBI and the Insolvency and Bankruptcy Board of India so that no further altercation should be there[4].

As far as this case is concerned, the jurisdiction of SEBI should be applied as the business of collective investment scheme is well within under the jurisdiction of SEBI act and IBC should not be executed in such a manner so as to let go the defaulters who prima facie violates the provision of other legislations. We can't just allow a company to carry on with its business in violation of the SEBI act which has its own substantial value.

  1. SEBI act, 1992(No. 15 of 1992)
  2. Corporate insolvency resolution the procedure, available at: (last visited on Jan 6, 2021)
  3. The Insolvency and Bankruptcy code, 2016 (No.31 of 2016)
  4. IBBI, SEBI sign MoU for better implementation of IBC available at (last visited on Jan 6, 2021)
Written By:
  1. Brahm Sareen and
  2. Shivesh Saini

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